The Biden-Harris campaign has been clear on the measures they intend to accomplish, but silent on some of the biggest threats facing the economy, threats that could lead to political suicide if botched. In this article I summarize what we know about the Biden-Harris agenda and then move on to the challenges facing this administration that we need to know about—but don’t (see my Baby Boomer Investing Show on this topic).
The Biden-Harris agenda
The following table summarizes the agenda. Most of these measures will be accomplished if Democrats win the Senate, but we won’t know if that will happen until January when the two Georgia run-offs are settled.
Figure 1: The Biden-Harris Agenda in a Nutshell
Source: Ron Surz
Health care was the focal point of the election, with Covid taking center stage as a second spike sweeps the U.S. Biden has made it clear that he will insist on mask-wearing and would not hesitate to shut down the economy if it is deemed necessary. But the good news is that several vaccines are on their way, and one or more might be available soon.
Covid treatment appears to be on the horizon, but its economic aftermath will be with us for a long time. In particular, the economic relief that the government has and will provide is not free, although many recipients think it is. I discuss the potential consequences of what I call “helicopter money” in the section below on the economy.
Beyond Covid, this country is paying dearly for its health care yet is not getting the best, as shown in the following graphic.
Figure 2: Comparing Health Care Quality and Cost Around the World
Source: Payden & Rygel
The size of the dots in Figure 2 reflects the size of the population. Europe is shown in yellow, the Americas in red, and Asia in green. As you can see, the U.S. pays the most for health care, but most European countries get higher quality. For example, many drugs can be purchased online from GlobalRx for substantially lower prices than in the U.S. It’s been said that the U.S. sponsors the research of drug companies.
The Biden-Harris administration has vowed to address this problem and to develop some form of universal health care, probably based on President Obama’s Affordable Care Act (ACA).
The new administration will inherit some serious economic problems including a world debt crisis, bubbles in stock and bond prices and social unrest created by a growing wealth divide. I discuss each in the following.
World debt crisis
“Per Capita World Debt Has Surged to Over $200,000”
is one of my most-read articles. Its manifestations are summarized in Figure 3 below.
Figure 3: Consequences of Staggering Global Debt
Source: Target Date Solutions
An example of how the world got into this mess can be seen in the liability for Social Security and Medicare in the U.S., totaling $76 trillion, and prompting commentators to predict that these very important programs are going broke—first Social Security in 2026 and then Medicare in 2034.
But Modern Monetary Theory (MMT) advises otherwise: These programs will not go broke because the government will simply print more money—problem solved. Money is currently “printed” when the Treasury issues new debt, but the usual buyers—foreigner and U.S. citizens—aren’t buying, so the Federal Reserve is buying most of the new debt.
MMT cautions that this printing could cause inflation, in which case the new money needs to be reined in with taxes. Will Congress have the political will to “unprint?” Quantitative Easing (QE) of $4 trillion did not increase inflation as measured by the CPI, but it did add to the inflation of the bubbles in stock and bond prices (as we will discuss further below).
The newest round of printing is for Covid relief, already at $3 trillion with another $3 trillion likely. This money will move the CPI meter because much of it is going to people who are using it to buy groceries and pay rent. This has led to an ongoing debate about inflationary versus deflationary forces. As shown in Figure 4, some level of money printing is likely to weigh the scales toward inflation, although deflationary pressures are the current winners.
Figure 4: Inflation the Price of Covid Relief?
Source: Target Date Solutions
Stock and bond market bubbles
One of the “cures” for excessive debt is to not pay interest, so the Federal Reserve and other central banks have engineered ZIRP: Zero Interest Rate Policy. Bond yields are being manipulated by paying too much for them—a bubble.
Stock prices are also excessively high, although there is disagreement about how “expensive” is defined. Price/earnings ratios are currently exceedingly high by historical standards, but defenders of current prices say they are justified by low interest rates, since future earnings are now being discounted at lower rates.
This is partially true. Lower rates should have increased stock prices by 50% in the past decade, although prices actually increased 250%. Also, the troubling part of this observation is that bursting of the bond bubble will cause a bursting of the stock bubble, to the tune of about 50%.
Warren Buffet developed a measure of bubble detection that has successfully predicted market crashes. It’s the ratio of the value of the stock market to GDP. The norm is 80%. Excesses well above 80% are a bubble. As you can see in Figure 5, the stock market is currently 220% into ‘Bubble Land,’ which is 275% of the 80% norm.
Figure 5: In Bubble Land
Source: Target Date Solutions
When the stock market reacted to Covid in February with a 35% decline, many viewed it as “the match that lit the overvaluation tinder.” But the subsequent recovery brought the Buffet ratio even higher, from 180% at the start of the year to 220% currently. The bubble continues to inflate. Everyone knows that bubbles cannot inflate forever.
The run-up in stock prices has exacerbated the wealth divide—the rich have gotten even richer, making those with little money even more frustrated and angry.
The top 10% of wealthy people in the U.S. own 68% of the wealth. This concentration of wealth has given support to socialistic reforms. The other 90% want more of the wealth in this country.
Figure 6: Distribution of Wealth in AmericaLevelers: Taxes, Market Corrections and Socialism
The bursting of the stock and bond market bubbles will solve part of the problem, since much of the wealth is held in securities. But this won’t make the 90% any richer, and in fact their 401(k) savings will suffer.
Protests will likely continue. In my view, it’s like the Russian Bolshevik Revolution in the 1920s. The rich are simply outnumbered, although they might be able to pay for protection. The current election fraud controversy is fanning the flames. If proven, the U.S. will become a different country.
The Biden-Harris administration faces serious problems that will be hard to solve. Investors should be prepared for the possibilities of serious inflation and crashing securities prices.
Don’t shoot the messenger! I’m just identifying the threats. You are the judge of my views. I hope I’m wrong.
Prestigious firms like Goldman Sachs and others predict a rosy 2021, although some see this as overly optimistic. Can investment management firms afford to worry publicly? For some guidance on protection, see my article “How to Minimize the Impacts of Inflation, Recessions and Stock Market Crashes.”